CorVel Corp (CRVL) 2013 Q1 法說會逐字稿

Thank you for standing by. Welcome to the CorVel Corporation earnings release conference call. During the course of this conference call, CorVel Corporation may make projections or other forward-looking statements regarding future events or the future financial performances of the Company. CorVel wishes to caution you that these statements are only predictions, and that actual events or results may differ materially.

CorVel refers you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically, the Company's last Form 10-K and 10-Q filed for the most recent fiscal year-end quarter. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

At this time, all participants are in a listen-only mode. A question and answer session will be conducted later in the call, with instructions being given at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Gordon Clemons. Sir, you may go ahead.

Thank you for joining us to review CorVel's June quarter. In the quarter, our TPA business continued to win clients, whose service will begin in the current quarter and later in the year. We began an expansion of investment in our Network Solutions business.

Adjustments to our expenses were also initiated. A couple of productivity management projects were started that should have an impact later this year.

Revenues for the June quarter were $105 million, 2% over the $102 million in revenue for the June 2011 quarter. Earnings per share for the quarter ended June 30, 2012 were $0.58, up 30% sequentially from $0.44 in the March quarter. The earnings per share for the June quarter of 2011 were $0.70.

The cost reduction efforts we were planning the last time we spoke to you are underway. The adjustment from these efforts will begin to impact the September quarter, and will continue as we work forward for the coming year.

During such periods, it is also appropriate to evaluate productivity, as well as cost levels. We have initiated a couple of programs I mentioned on the last call, designed to improve our labor productivity. We expect some progress on these to be visible in the September quarter.

Until the health care insurers feel confident regarding the regulatory environment in which they'll be operating, I don't see us recovering entirely, though, from expense investments we made in preparation for new service to these large healthcare insurers. There is some progress there, but it's going to be difficult for insurers to plan effectively until well into the next calendar year.

The market for the Company's Claims Administration services continued to firm in the quarter. Premiums for casualty insurance have increased. Low investment income yields, past underwriting losses, and healthcare inflation are factors supporting higher insurance prices. In this part of the insurance cycle, employers tend to self-insure more of their risks, which in turn is supportive of the third party administrator market.

Workers compensation claims costs continued to increase in severity. Inflation in healthcare, and especially in pharmaceuticals, is a factor in the increase in claims costs. Pharmacy costs have continued to increase as a proportion of the total medical spend from employers. In addition, the use of opioids has expanded, creating dependency issues. These trends have increased interest in managed pharmacy programs.

The healthcare insurance industry is awaiting this fall's election and further guidance regarding the implementation or adjustments to Obamacare. This has caused some of our important group health clients to pause in their implementation of new initiatives. I expect insurers to wait now until next year with changes that require a firm understanding of the environment in which they'll be operating.

On the other hand, the healthcare legislation, regardless of how it is modified and eventually implemented, appears to have created encouragement for more assertive management of such benefits. Thus, although at present, many plans are on hold, there is increasing interest in some of our medical management tools. We have got to be careful to support prospective clients' new initiatives, and yet, to expect the decision and implementation cycles to be long.

This is an uncertain market environment, and our strategy in it remains, as it has been, to expand our enterprise comp business, and to continue to serve payers throughout the casualty markets. Our market has already been regulated, but it is unusual to have the level of regulatory uncertainty that we have at this time in the private healthcare markets. Workers compensation is a state-regulated business, though, and not directly impacted by Obamacare.

As I mentioned a moment ago, CorVel has developing business in the group health market, which has been slowed by the uncertainties in regulation there. Given the uncertainties on taxation and healthcare regulation, we've allowed our cash balances to rise. This will increase our ability to act when the regulatory cloud clears.

We've closed a number of nice accounts in the June quarter for service beginning in the September quarter. As I stated on the last call, we're now entering a phase of our expansion where we are benefiting from growing brokerage industry support for our product. The brokerage community, and the large insurers who must back our product, have each begun to recognize our brand and to support it in the marketplace. This has added a new and important channel to the Company. We have committed resources in support of broker sales.

Integrating our Managed Care and Claims Administration services is one of our highest strategic priorities. The projects we've discussed in previous quarters have steadily improved our total TPA product.

As we have completed the early rounds of application development, we've consistently found new ideas to further leverage CorVel's unique position, controlling most of the services important to claims management. As our customer list has grown, we've also added to the concepts involved in these integration initiatives.

In addition, the Liability Service offering is the primary line extension for the current year. We've seen quite a bit of interest in liability management services. And we continue to see good opportunities to improve the systems that support all of our services.

Now I'd like to discuss our product line results. Patient Management revenue for the quarter was $53 million, an increase of 9%. Gross profits increased 15% over the June quarter of fiscal 2011, and 12% sequentially from March. Patient Management includes third party administration -- that is, TPA services, and traditional case management. TPA services have been growing at over 20% annual rates, and have become an important driver of overall Company results.

Our Case Management business declined somewhat during the recession and the ensuing soft labor market, but has been improving recently. We have invested in mobile computing applications for this service, and will be implementing some impressive capabilities later this year. There are opportunities to better differentiate this service, and we see improving results.

Network Solutions revenue for the quarter was $52 million, down 4% from the same quarter of the prior year. Gross profit was up 6% sequentially, but was down 8% year over year.

As I mentioned, this product line includes services of growing interest in the group health market. CorVel offers a unique product which uses very detailed databases of hospital charges to permit the comparison of hospital charges in different markets. This allows insurers and employers to seek improved pricing for the important facility-based segment of their healthcare costs. The regulatory changes now coming into the healthcare market will increase the cost for employers of their employee benefits programs, and this is motivating more assertive management of the cost of these programs.

Pharmacy management is an active segment of our Network Solutions product line. CorVel's ability to integrate its pharmacy benefit management service with its bill review product creates unique savings for employers. We have expanded our outbound call center activities to product substantial savings for employers. Active assistance to employees regarding their use of pain medication drugs helps identify risky prescribing patterns, and reduce employers' exposure to liability claims. This is just one example of the opportunity to employ clinical modeling to improve healthcare outcomes.

Now I'd like to talk about our product development. Product development continues to be an extremely busy center in the Company. In the quarter, we began some new investments in our rules engine technology, and continued active development of several ongoing projects. I won't speak to all of them, but the first is claims intake.

Extremely timely claims intake is a key to managing the cost of healthcare. To be immediately aware of the onset of an episode of care, CorVel has been working on mobile computing apps for use by employers. The goal in this is to be able to provide assistance to patients as early in their experience with a healthcare event as possible.

The workflow at each employer can be quite different, creating a fairly complex challenge conforming our processes to those of our clients. Our work is taking our service interface from hubs at each employer out into the operations of the employer. This has required us to navigate aspects of healthcare management formerly outside the definition of our service scope, but it opens the door to new forms of managed care.

A second area of interest for us is automated workflow. Automated workflow can bring specialization of labor to insurance claims processing. After years of automation of claims management, we believe we're closing in on some new capabilities. Because CorVel handles most components of the total claims management environment, we have had the potential to change the interfaces between services normally provided by different organizations in the workers compensation industry. Over the last couple of years, we've begun to produce unique results to this effort. Our pharmacy management services demonstrates superior results achieved through the integration of our pharmacy benefit management and bill review services.

Each quarter going forward, we expect to expand the list of similar improvements. The use of specialty call centers for outreach activities is an example of the kind of change created by this initiative. To do this requires that all service components be on the same database, something that is only possible when all services are contained within one organization, such as they are within CorVel.

In future quarters, I'll talk more about some of our systems interfaces and the work in our analytic tools, which have been ongoing projects, but I'm not going to cover them in this call today.

Now I'd like to talk about a couple of the additional statistics that we bring each quarter.

The quarter ending cash balance was $15 million. Our DSO was 40 days. 87,000 shares were repurchased in the quarter. We have now returned $274 million to shareholders in the last 15 years, and believe this is the most flexible way to return capital to shareholders. Repurchases allow those shareholders who wish to remain invested to hold larger percentages of the Company without triggering dividend taxes. Those who prefer cash distributions can sell a pro rata portion of their shares and achieve a cash dividend. Shares outstanding at the end of the quarter were 11.274 million, and diluted EPS shares were 11.426 million for the quarter.

I'd now like to turn the call back over to the operator to open the question and answer session.

Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) Your first question comes from the line of Gregory Macosko of Lord Abbett.

Yes, thank you. With regard to the Network business, it did -- the growth did slow down or decelerate first quarter versus second quarter. Could you talk about some of the key wholesaling customers I believe that you have in that area, and I know that you're -- I believe you're expanding that service to some extent. For that, you added a facility in California or something. Could you talk about that a little bit?

Yes, Gregory, thanks. Well, the Network business is sort of our -- I'd say, backbone service. It's comprised of our PPO -- or, our PPOs, we have multiple networks -- and our bill review service. We also have some specialty review products that layer in additional savings on large bills, especially facility bills.

That is a key part of the Company's business. It is a very high value added sector. We have a unique position there. I think in fairness, we've spent three or four years here where we have put a lot of attention into expanding into the TPA area, and that business has lower margins than the Network Services. But we continue to be focused in the other area.

I would say that the mid-tier carriers and some of the -- all but the very largest carriers are ideal customers for CorVel, and in addition, state funds such as the California State Fund, those kinds of entities, would also be target markets for us.

It is, you know, in the sense of the value added nature of our service, it's probably the best part of the business. But it has been soft this last year, something we hope to pick up here in the future.

I believe there was -- you were opening a facility in California, or working with a particular customer. How is that going?

I'm not familiar with that. We do have some states where there are specialty networks that are certified by state regulations, but they can be in multiple states. California would be one. But we don't have any facility based care that we deliver. We're always just a behind the scenes network provider, and not the actual caregiver.

I understand that. But I thought that for your operations and for the Network operations, I thought that there was a separate or a new location, where your people would be working from and that you were setting up. Maybe I'm mistaken.

Yes, we did have a pretty big investment in a facility in Texas, and then we've had some delays in the group health market that have caused us to carry some expenses there, and maybe that's what we were talking --

Yes, I believe -- yes, that is what I'm -- just talk about that, and how that particular situation is working out.

Yes. Well, we're certainly excited about that product. That's a specialty product for reviewing facility-based bills. We have a very unique database under that, that is cross-mapping all hospital databases into one common database. It allows us to deliver a very well substantiated review for carriers. And it has been coming along well, but then we had some slowdown when one carrier wanted to kind of rethink the way they were setting up their contracts with customers in order to allow the kind of review that we do.

I'd say that the challenge in here is that that product provides a more assertive review than most carriers have historically been involved in, and as a result, they're always a little cautious getting started. I think with the regulation, or with Obamacare being kicked around this year, they have been especially, I think, hesitant to jump in, in front of things.

But at the same time, we see them taking a more firm position with regard to out-of-network bills, feeling they're going to have to be tougher on bills than they were in the past, especially those people going out of network. I think just today, I think it was Humana, had a disappointing earnings release, and I think WellPoint did last week. So they're definitely feeling the pressure of healthcare inflation.

So, we're optimistic about that product, but as I said in the call, I think we're six to nine months away from seeing any movement there. We just need some clarification on the government regulations.

With regard to that one particular carrier that was interested or was going to be involved with that Texas facility, I believe, is that carrier still on board, or is there still some question there? Give me a feeling for that.

Oh, yes -- no, they're -- yes, and they have actually begun working with us, and I would say, it hasn't jumped up to the volume that we were originally hoping for. I think they're going to go on a kind of -- going slow here for a little bit. But no, that one has come along, and then we have a subsequent sale that is going to be starting, I really think more like January, but we've already closed another one since then.

So there is -- I would say, the thing that's been a little confusing to us is, there is heightened interest in the market for the product, but -- and I think the carriers, I would say, are kind of getting their ducks lined up for what they think is going to be a more -- I don't know, challenging 2013 and 2014.

So, we're used to things moving a little faster in the comp market, and I think we -- you know, we got a little in front of ourselves in some of these group sales. But all in all, I think the product is looking better all the time.

Okay, but just to summarize then, that particular situation is progressing, maybe not as fast as you would you like, but you are sort of ramping slowly and seeing additional customers express interest and come on board, one other one perhaps in January?

Yes.

Okay, good. Thank you very much.

You bet.

Are there any further questions? Your next question comes from the line of Daniel Baldini of Oberon.

Hi, good morning. I just wanted to follow up on a comment you made during your prepared statement, about letting the cash build up. And I'm curious to know why you're doing that. Is that in anticipation of further acquisitions, or what? Thanks.

Okay. Yes, and I think you know, it's always good to remind everybody to remember the size of CorVel. We're pretty small, so when we say cash is building up, it's probably something most companies might not even notice, but anyway.

We have slowed our stock repurchases a little bit, and just been a little more cautious with capital expenditures. I feel like it's a good time for us to -- we're faced with this uncertainty about how healthcare legislation is going to go, and so we're just being a little more cautious on the balance sheet side.

We -- I like to think that companies can be either aggressive operationally or aggressive financially. We have had a tendency to be, I'd say, financially conservative, and the on the operations side, more decentralized and aggressive. So it's probably not out of character for us to be a little on the conservative side, financially. We've never had any debt. And here, we're just letting the cash build up a little bit in lieu of, I suppose, stock repurchases.

There, I guess I'm hopeful that we'll see some opportunities in the marketplace after the legislation settles down, but it could be, we'll be back on the same path we were before, where we were doing stock repurchases. But at the present time, we're just a little slower on that than we were, say, a year ago.

But the cash is not -- you know, it's not changed dramatically, it's just a little bit higher than it has been.

Okay, thanks.

Are there any further questions? There are no further questions. Mr. Clemons, do you have any further remarks?

No, I don't think so. I'd like to thank everybody for joining us, and we'll look forward to seeing you again at the end of the next quarter.

This concludes our conference call for today. Thank you for your participation. Please disconnect at this time.